Can You Trust the Trustee?
November 14, 2022
By Kriste Rodriguez, CPA/ABV
Trustees and executors have a fiduciary responsibility to the beneficiaries of a trust or an estate. Fiduciary duties include:
Duty of Loyalty – To invest and manage trust or estate assets solely in the interest of the beneficiaries.
Duty of Care – To exercise reasonable care and skill in asset management. If not addressed specifically in the governing document, the Uniform Prudent Investors Act requires a trustee to manage assets as would a prudent investor.
Duty of Impartiality – To not favor any beneficiary over another.
Duty of Disclosure – To provide complete and accurate information as to the property and transactions in the trust or estate.
A breach of fiduciary duty happens when the fiduciary acts in the best interest of themselves or someone else, rather than the beneficiaries. Fiduciaries should not use estate or trust assets for personal gain. The fiduciary’s failure to act on behalf of the beneficiaries could leave them liable for their negligence and, in some cases, may even lead to criminal charges. Beneficiaries can become victims of fiduciary fraud or fiduciary abuse either accidentally or intentionally.
An executor has the duty to bring the estate to a conclusion by maximizing the beneficiary’s inheritance. This is done by bringing together the estate assets, settling the deceased’s debts, and distributing the remaining assets per the will. A formal accounting of the estate, detailing every asset and justifying every expense, is a must. Similarly, the trustee has the same responsibility as the beneficiaries of the trust, and a formal detailed accounting of every expense must be presented.
Typical Breaches of Executor Fiduciary Duty Include:
- Commingling of estate assets
- Losses created by the trustee or executors’ wrongful act or omission
The Following Red Flags May Suggest Estate Fraud:
- Any will, instrument or trust agreement executed by someone whose death is imminent.
- If the decedent depended on a beneficiary to provide basic quality-of-life items.
- A spouse or child that is excluded from the will for no apparent reason.
- The will primarily benefits non-relatives, a home health care worker or financial advisor.
- The will was not drafted by an attorney or signed in the presence of an attorney or notary.
- The will does not accurately reflect the decedent’s estate.
- The decedent’s estate is incomplete.
- Substantial gifts were given just prior to the decedent’s passing.
- Multiple wills were executed, dating back two years prior to death.
- Assets were given away prior to death by the power of attorney, especially if the power of attorney was the asset recipient.
Red flags are not always readily apparent nor a clear indication of estate fraud. However, the presence of multiple irregularities upon review of an estate by a forensic accountant may signal an increased likelihood. Estate fraud often involves people closest to the decedent, because they can use their power and undue influence to coerce, manipulate or defraud the estate.
Trust fraud can have many of the same irregularities as estate fraud. The following irregularities are specific to a trust, and the presence of any of them could indicate wrongdoing or breach of fiduciary duty by the executor or trustee:
- The trustee or executor delays trust or estate administration while they manipulate assets.
- The trustee’s own finances are commingled in the trust.
- Trustee may have a conflict of interest with the beneficiaries.
- The trustee fails to prevent another party breaching a trust.
- The trustee does not meet legal requirements, use reasonable judgement, or willfully uphold the law by self-dealing (e.g., stealing, modifying terms, wasting money or acting inappropriately).
Certain frauds can start before estate administration even begins. Someone can present a false will or codicil, or one that has been superseded or revoked. Someone could have taken assets while the decedent was ill or just after his/her death. Other frauds can occur during the administration of an estate or trust and by the very person the decedent or grantor trusted.
In the event that an executor or trustee is proven to be in breach of their fiduciary duty, they could face a number of civil consequences, along with special damages. For example, an incident of constructive fraud, a tort of deliberate omission or alteration of facts, may lead to fines and repayment to beneficiaries or even the removal of a trustee in extreme cases.
While the trustee or executor may often appear to be acting in the best interests of the beneficiaries of a trust or estate, a forensic accountant may be needed to review the activities of the underlying assets of an estate or trust to ensure their proper distribution to the beneficiaries.
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